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Lost for direction? - Views on News from Equitymaster
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  • Apr 29, 2006

    Lost for direction?

    This week's trade saw a significant amount of volatility being witnessed, as the indices seemingly struggled to find a clear direction after hitting record highs of over 12,000 (Sensex) last week. In fact, the index movements this week make one wonder as to whether one is looking at stock movements or a valley with crests and troughs! Such was the volatile movement seen, as participants seemingly started to get jittery at the record levels, impacted also partly by the crackdown on market intermediaries initiated by market regulator, Securities and Exchange Board of India (SEBI) towards the end of the week. For the week, the BSE-Sensex gained 0.1%, while the NSE-Nifty lost 0.4%.

    After the phenomenal gains of the last week, the indices opened this week on a fairly weak note, as profit booking appeared to take centre stage. High oil prices, which crossed US$ 75 a barrel, and weak Asian markets, seemingly prompted participants to take some profits off the table. The following day proved to be even worse, as volatility reigned supreme, with the Sensex trading in a range of as many as 331 points. The weakness also seemed a result of traders unwinding positions after the exchanges raised margins for the second time in April. Continuing high oil prices also dampened sentiment. Wednesday saw a strong recovery by the indices, aided by a comedown in crude oil prices and strong Asian markets, as participants opted to bottom fish at lower levels. However, Thursday saw further weakness, due to weak Asian markets and the expiry of April derivatives contracts.

    The indices on Friday witnessed a huge amount of volatility, particularly at the start, mainly due to market regulator, SEBI's crackdown on certain market intermediaries for their alleged role in the IPO allotment scam. The Sensex at its low point, was down by as many as 490 points (or 4%), as panic gripped the market in the opening moments of trade. However, to the surprise of the bears, the bulls, which were waiting on the sidelines to grab such an opportunity, did not think twice before plunging into the markets and bottom fishing at lower levels, as the markets witnessed a sharp recovery within the opening hour of trade. Though the bears kept their pressure on for most part of the day, it was victory for the bulls as, armed with liquidity, they continued to buy and pulled the markets back into the positive territory. The strength seen towards the end of trading on Friday continued on Saturday as well, with the exchanges holding a brief session in order to test their back-up facilities at Chennai. In fact, on Saturday, the strength shown by the Sensex enabled it to close above the 12,000-mark for the second consecutive week.

    As regards institutional activity this week, the Foreign Institutional Investors (FIIs) were net buyers to the tune of Rs 20 bn in the first 4 trading sessions of the week. However, it should be noted that this number is inflated, as it includes IOC's sale of its stake in ONGC to FIIs. Domestic mutual funds (MFs) stood by the bulls all the time, as they bought equities worth Rs 11.4 bn. To date in 2006, the FIIs have pumped in US$ 4 bn into the Indian stock markets, while the domestic MFs, not wanting to be left out of the action, have bought equities to the tune of US$ 1.1 bn.

    Top gainers over the week (NSE-50)
    COMPANY Price on Apr 21 (Rs) Price on Apr 29 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 12,030 12,043 0.1% 12,102 / 6,138
    S&P CNX NIFTY 3,573 3,558 -0.4% 3,599 / 1,896
    DABUR 133 159 19.2% 160 / 58
    ZEE TELE 243 263 8.1% 291 / 129
    HINDALCO 211 226 6.9% 222 / 107
    ACC 963 1,013 5.2% 981 / 354
    RELIANCE 975 1,024 5.0% 1050 / 412

    Now let us consider some sector/stock specific developments this week:

    • Sun TV made its debut on the bourses this week, listing at a premium of 55% to the allotment price of Rs 875 per share and made a lifetime high of Rs 1,500 (71% premium). Sun TV was launched in 1993 and was amongst India's first regional satellite television channels. As the businesses grew, the company launched additional channels in Tamil, Kannada and Malayalam. Today, Sun Network is India's second largest television network and the largest television broadcaster in the south Indian states of Tamil Nadu (TN) and Kerala with 14-channels. The company also operates 4 FM radio stations and expects to start operations in 41 more cities (45 in total). Apart from this, the company also publishes 2 daily newspapers and 4 magazines in several Indian languages. Other media stocks

    • TCS expects to earn revenues worth US$ 200 m by 2010 from its South African operations, as against US $28 m in FY06. TCS, one of the first Indian software companies to enter South Africa in 1995, expects the banking industry and government-related business to be the main drivers for its growth in the market there. Further, in related news, the company has planned a capex of Rs 10 bn for FY07. The investment is for technology and infrastructure purposes. TCS is going for this capital expenditure in order to expand its operations in Chandigarh, Bhubaneshwar, Kochi, Coimbatore, Nagpur, Indore and Vishakhapatnam. Going forward, given strong ramp-ups in the BPO business (Pearl) and good customer additions, visibility appears good. The stock was down marginally this week. Other software stocks.

    • Oil marketing major, IOC, expects to commission 15,247 of its retail outlets in urban and metropolitan locations across the country, based on the performance and viability of each outlet during FY07. In the current financial year, the state-owned oil company would focus on the rural market, as it plans to add 1,000 new outlets to its existing 557-station rural network. IOC is going in for this expansion so as to improve sales as well as to increase its presence and reach in rural markets. This will give it the benefit of being the first player in these 'virgin markets'. However, due to the arbitrary government policy on oil pricing, profit growth remains unpredictable. In related news, the company sold 20% of its 9.2% stake in ONGC this week to domestic and global investors for Rs 37 bn and reaped significant profits on the same. Other energy stocks.

      Top losers over the week (NSE-50)
      COMPANY Price on Apr 21 (Rs) Price on Apr 29 (Rs) % CHANGE 52-WEEK H/L (Rs)
      HCL TECH 619 575 -7.2% 708 / 331
      RANBAXY 505 474 -6.1% 568 / 339
      SATYAM 810 763 -5.8% 918 / 395
      GAIL 306 288 -5.7% 326 / 199
      GSK PHARMA 1,486 1,410 -5.1% 1554 / 692

    The markets continue to scale new peaks with almost mechanical efficiency, surprising even the most optimistic investors. Even when profit booking drags the indices down to lower levels, abundant liquidity, both global as well as domestic, ensures that the bulls pick up stocks at lower levels, lending enough support and once again, sending them into uncharted territory.

    The Sensex, at current levels, trades at around 22 times its trailing 12-months earnings (about 18 times on FY07 basis), which appears unattractive from an investment point of view. This takes into account expectations that the top companies will grow bottomlines by over 20% in FY07. However, the fact that most of the results declared so far have been in-line or above expectations, have provided the bulls with another reason to continue to pump in money into Indian equities. The results out-performance from major companies from sectors such as software has led to continuing euphoria on the street. We would, however, advise investors to remain cautious, as stocks have discounted valuations of the next 4 to 6 quarters, which makes it a rather risky proposition to invest at the current juncture, as any financial disappointments by India Inc could have serious negative repercussions on investors' portfolios. Happy and safe investing!



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